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More oversight needed to ensure intended contracts go to disadvantaged firms

Oct. 14, 2012 - 02:52PM   |  
By BENJAMIN B. TYMANN   |   Comments

The government has been aggressive in pressing recipients of federal funds to step up their oversight of Disadvantaged Business Enterprise (DBE) programs. DBEs, broadly speaking, are small businesses that are majority-owned by women, minorities or certain military veterans. Many federal contracts require participation by DBEs.

Federal regulations also oblige grant recipients to monitor contractors’ compliance with DBE requirements, including that a DBE to whom work is contractually committed is performing a “commercially useful function” — that is, doing the contracted work with its own personnel and resources.

But mounting examples of wrongdoing in DBE programs have called into question the effectiveness of recipients’ oversight.

As a result, the government increasingly has focused on the role that poor monitoring by recipients has played in failing to stop that wrongdoing. Federal managers with responsibilities for evaluating DBE compliance also are more likely to be pressured to scrutinize recipients’ monitoring practices.

In the most recent example, the Federal Highway Administration (FHWA) in August issued a report rebuking the Oregon Department of Transportation (ODOT) for failing to detect fraudulent conduct allegedly committed by DBE program participants on a federally funded $35 million highway project.

Before the project’s completion, a whistle-blower filed a complaint with FHWA alleging DBE fraud on the part of the project’s prime contractor, a DBE trucking firm and a non-DBE trucking firm. FHWA’s investigation concluded that the three companies had “contrived a relationship for the purpose of meeting the DBE contract goal” — specifically, that the prime contractor had won the highway contract on a promise to meet a DBE requirement by using the certified DBE trucking company, then used a non-DBE trucking company instead and falsely reported that the DBE firm had done the work.

The FHWA report could lead to serious consequences for the alleged wrongdoers, including suspension or debarment and potential criminal prosecution. But what stands out in this report is FHWA’s unvarnished criticism of ODOT.

The state agency, FHWA found, “failed to exercise effective DBE program oversight pertaining to the trucking operations on the Project,” and as a result, “failed to comply with … DBE program regulations.”

Other recent episodes of state and local agencies being called out for deficient DBE oversight include:

• The Washington Department of Transportation came under fire earlier this year when an investigation yielded allegations of fraud in DBE programs and a pattern of ineffective oversight. The agency allegedly ignored multiple instances of companies being allowed to participate in DBE programs, even though they did not meet eligibility requirements or did no meaningful work on the project.

The U.S. Transportation Department stated it had lost confidence in Washington’s program and reminded the state agency that it “has the responsibility to ensure compliance with all Federal requirements” on DBE programs.

The federal agency also warned that loss of federal aid on state highway projects could result if the state failed to address the concerns.

• This past summer, the acting administrator of the Federal Aviation Administration, Michael Huerta, called on the nation’s airport authorities to increase compliance monitoring over their DBE and airport concessions DBE programs.

“We are accountable to the nation’s taxpayers,” Huerta said, “and the success and viability of the [DBE] program depends on both its integrity and its credibility.” Huerta’s push for greater scrutiny followed in the wake of a 2012 federal investigation over alleged fraud at Cleveland Hopkins Airport, where a prime contractor allegedly reported falsely that a DBE subcontractor had performed work contractually committed to it that it had not, in fact, performed.

If instances of DBE fraud continue, federal scrutiny of why recipient agencies failed to deter such wrongdoing will intensify. Pressure within federal agencies to make this issue a priority is likely to rise accordingly.

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Benjamin B. Tymann is a shareholder at Greenberg Traurig LLP, specializing in government contractor compliance and investigations.

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